Are employers ready to provide an incentive for 401(k) deferrals?

An employer now may give a de minimis financial incentive to employees who elect § 401(k) contributions.

If that incentive is a “low-dollar gift card” some in Congress mentioned, an employer likely must tax-report on Form W-2 as taxable wages the gift card’s cash-equivalent amount.

What do BenefitsLink neighbors think about whether America’s payroll people are ready to take on that work?

I suspect it will depend on whether the company has used this type of payment for other reasons.  For example, the company already could offer incentives tied to achieving certain goals in wellness programs, or the company could have a history of sending holiday gifts cards.  If payroll already has experience with small incentive payments, then this will be just another one.  If payroll does not have that experience, then this likely will be an onerous task for them. 

It will be interesting to see how many companies that do decide to offer financial incentives wind up messing up the calculation of plan compensation. 

Paul I, thank you for your smart observation about how payroll's capabilities might follow from experience with similar incentives.

About employers that might omit the incentive’s amount in counting compensation as a plan’s governing documents define it, could a retroactive plan amendment in 2025 or later legitimate what was done after 2022?

SECURE 2022’s remedial-amendment period applies, if other conditions are met, “to any retirement plan or annuity contract which is made—pursuant to any amendment made by this Act or pursuant to any regulation issued by the Secretary of the Treasury or the Secretary of Labor (or a delegate of either such Secretary) under this Act[.]” Consolidated Appropriations Act, 2023, SECURE 2.0 Act of 2022 § 501(b)(1)(A).

One imagines the designers of IRS-preapproved plan documents might add yet another box to check (or leave unchecked) for an exclusion or subtraction from what a document otherwise provides as a measure of compensation.

The payroll company I worked for never counted the value of any gift cards we received on our W-2's. The amounts varied from $10-$100.

Will the IRS clarify that any gift card under a certain amount need not be counted on the W-2? Will the IRS allow companies to get a tax break on any of these gift card if companies chose this incentive? 

A few points on this topic. The following is from IRS Publication 15-B.  

It clarifies that cash or cash equivalents are never de minimis. This is for income taxes so we'll need a different definition of de minimis for purposes of the new SECURE 2.0  provision. But, whatever that definition is, it won't change the tax treatment (i.e., giving a gift card won't disqualify a plan but it would result in taxable income). 

Virtually all pre-approved plans have (or should have) the ability to exclude fringe benefits, etc. from the definition of compensation for purposes of deferrals and matching contributions. And most employers should have this elected because permitting deferrals out of comp that includes a taxable fringe benefit is problem waiting to happen.  

De Minimis (Minimal) Benefits

You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable. Cash and cash equivalent fringe benefits (for example, gift certificates, gift cards, and the use of a charge card or credit card), no matter how little, are never excludable as a de minimis benefit. However, meal money and local transportation fare, if provided on an occasional basis and because of overtime work, may be excluded, as discussed later. Examples of de minimis benefits include the following. • Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. See Employer-Provided Cell Phones, later in this section, for details. • Occasional personal use of a company copying machine if you sufficiently control its use so that at least 85% of its use is for business purposes. • Holiday or birthday gifts, other than cash, with a low fair market value. Also, flowers or fruit or similar items provided to employees under special circumstances (for example, on account of illness, a family crisis, or outstanding performance). • Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount isn't more than $2,000. • Certain meals. See Meals, later in this section, for details. • Occasional parties or picnics for employees and their guests. • Occasional tickets for theater or sporting events. • Certain transportation fare. See Transportation (Commuting) Benefits, later in this section, for details. Some examples of benefits that aren’t excludable as de minimis fringe benefits are season tickets to sporting or theatrical events; the commuting use of an employer-provided automobile or other vehicle more than 1 day a month; membership in a private country club or athletic facility, regardless of the frequency with which the employee uses the facility; and use of employer-owned or leased facilities (such as an apartment, hunting lodge, boat, etc.) for a weekend. If a benefit provided to an employee doesn't qualify as de minimis (for example, the frequency exceeds a limit described earlier), then generally the entire benefit must be included in income. Employee. For this exclusion, treat any recipient of a de minimis benefit as an employee.